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ASIC to crack down on miners’ dodgy overseas assets to prevent the next Sino-Forest; failure of auditors to meet generally accepted auditing standards with respect to collecting evidence regarding overseas operations

Over a third of companies listed on the Australian Securities Exchange, predominately mining and resource companies, have significant operations or assets located across Asia, South America and Africa.Photo: Reuters

The Australian Securities and Investments Commission is concerned Australians could be sucked into ­investing in companies listed on the ASX but mainly operating overseas that do not meet Australian ­corporate-law ­standards.

ASIC plans to review a significant proportion of important corporate ­documents, including prospectuses which raise money from Australian investors, despite the companies’ ­operations being based predominately in emerging markets, including China.

Over a third of companies listed on the Australian Securities Exchange, predominately mining and resource companies, have significant operations or assets located across Asia, South America and Africa, leaving Australian investors exposed to foreign corporate corruption and poor legal protections.

The high-profile collapse of ­Chinese-based timber harvester Sino-Forest Corporation, which traded on the Toronto Stock Exchange and now faces allegations of fraudulently inflating its assets and earnings, heightened ASIC’s concerns local investors could be burnt by poor practices overseas.“ASIC wants people to have trust and confidence in the companies in which they invest, so we have shone a light on emerging market issuers and their ­governance and disclosure,” ASIC commissioner John Price said.

“We want to lift the sector’s ­transparency and make investors aware of what is going on.”

But stock brokers and professional investors believe many companies operating in fast-growing economies, such as China and in Africa, offer more potential, despite less developed legal systems than Australian companies.

Pengana Capital fund manager Tim Schroeders said ASIC faced a fine line to enforce the market’s integrity without overwhelming companies with ­regulations.

“The biggest problems always occur with the smallest companies who you don’t want to overburden with ­compliance,” he said. “The more ­speculative companies do fit the bill in terms of offshore ­operations, low ­visibility and opaque accounts.”

ASIC’s last review of 760 companies from emerging markets in 2013 ­identified poor corporate governance, including a lack of boards or ­independent directors, over reliance on a handful of foreigners, difficulty accessing or verifying reliable ­information about overseas operations and complex ownership structures.

Mr Schroeders said professional advisers “needed to ask the right ­questions” and factor in risks, including local government and regulatory risk, pointing to ASX-listed Intrepid Mines whose investors were battered after the company lost control of its copper-gold project in Indonesia.

“It underscores the difficulties in emerging markets and the propensity for people to lose money very quickly,” he warned.

The regulator said for share offers made to the public, companies must provide adequate verification about the ownership of their assets and clearly disclose legal and regulatory risks to investors.

“Some emerging market issuers use complex structures to accommodate restrictions on the foreign ownership of assets,” ASIC warned after its last review. “This can result in an emerging market issuer not holding a direct ownership interest in its principal asset”.

On insider trading, ASIC said an upgrade to its market surveillance ­system, the Market Analysis Intelligence or MAI, and its recent ability to monitor trades through client identification numbers, provided a “quantum leap forward” for detecting ­misconduct.

The $44 million system has been built by the same company that builds ­trading software for algorithmic and high-frequency traders and allows the regulator to comb though thousands of trades in less than a second.

“We had a quantum leap forward with the MAI and then another ­powerful improvement with the client identifications from July 28 last year,” ASIC commissioner Cathie Armour said.

ASIC is also beefing up its computer programming skills within its detection team and is using algorithms to test market metrics that have never been examined before in the search for insider trading and market ­manipulation.

“We will detect you, and we will come after you and you may well go to jail,” warned Mr Price, who joined Ms Armour in taking The Australian Financial Review for a test run of the MAI surveillance system.

ASIC has been showing the system to brokers and investment bankers over the past few months to demonstrate its speed and sophistication.

“Speed is critical,” Mr Price said. “Evidence disappears and evidence goes cold and the longer you leave it, the more people’s memory fades.”

Thirty-eight people have been ­prosecuted for insider trading since 2009 with an 82 per cent success rate, including National Australia Bank insider trader Lukas Kamay and his Australian Bureau of Statistics ­university mate Christopher Hill, who pleaded guilty and were taken into ­custody for a $7 million insider trading scheme in December last year. They will be ­sentenced in February.

ASIC chairman Greg Medcraft has been calling for tougher criminal ­penalties for insider trading, including jail sentences of up to 10 years.

“You’ve got to lift the fear to suppress greed in the white-collar area,” he said.

ASIC will also continue to dedicate significant resources to its ongoing investigation into potential manipulation of the bank bill swap rate, which is used to determine billions of dollars of debt ­securities and influences the rate ­borrowers pay on their mortgages.

ASIC has already extracted “enforceable undertakings” worth $3.6 million from European banks UBS, Royal Bank of Scotland and BNP Paribas and last November ANZ Banking Group stood down seven traders in the wake of the investigation.

Mr Price said ASIC would put ­pressure on companies that sell ­investment products to “clearly and simply” spell out the main features of their products to investors this year.

“We are putting pressure on these gatekeepers to do the right thing by investors, so these investors can have trust and confidence in the financial system,” he said.

“But investors also need to help us help them. Investors need to do their homework. They need to ask questions, and get to grips with how the product works.

“If they don’t understand how the product works, then get some independent advice. If they still don’t understand the product, then do not invest.”

Guest Speaker Mr. Hemant Amin, Founder, Chairman and CEO of Asiamin Capital, a single family office, and Founder and Chairman of the BRKets investor groupMarch 17th, 2015

Hemant, a big thank you for educating and inspiring the next generation of leaders. You are a rare positive role model in the Asian capital markets and you showed the students that it is possible to create value because one has the right values and mindset like Buffett and Munger! :)